Foolish Face-off: Sembcorp Industries vs. Keppel Corp

Often times, as investors, we might have to make choices between companies that have similar operations for diversification purposes. It sounds easy, but such comparisons can be hard to make. So, we?re here to make life a little easier.

In our Foolish Face-off series, we have previously compared Singapore-listed companies with companies listed on other foreign stock exchanges. We?ve squared off Thai Beverage with SABMiller, seen who won between Singapore Press Holdings and Pearson, compared Singapore Exchange with the London Stock Exchange and even took to the skies with Singapore Airlines and International Airlines Group.

This time…

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Often times, as investors, we might have to make choices between companies that have similar operations for diversification purposes. It sounds easy, but such comparisons can be hard to make. So, we’re here to make life a little easier.

Sembcorp Industries has two main businesses – the Utilities and the Marine business. The Utilities business provides energy, water and waste-water treatment in Singapore, India, China, and the Middle-East region. It accounted for 55% of the company’s revenue of S$10.2b last year and has seen tremendous profit growth of 20% per annum since 2002 to S$375m.

Sembcorp Industries’ Marine business is represented by a 60% stake in another locally listed company, Sembcorp Marine (SGX: S51). The Marine business, which builds oil rigs, drill ships and the likes for oil & gas players and ship operators, accounted for 43.5% of Sembcorp Industies’ revenue in 2012.

The thirst for oil in the world should not be drying up anytime soon and that is reflected in the Marine business’s current net orderbook – it stood at S$13.6b on 26 Feb 2013 (the highest since 2005), excluding new contracts worth US$625m that were secured later.

The other contender for the Foolish Face-off title belt is Keppel Corp. The company also derives a significant portion of revenues (57% of the company’s S$14b in revenue last year) from its Offshore & Marine business. The other two major revenue streams for Keppel Corp comes from its Infrastructure and Property business – accounting for 20.3% and 21.6% of the company’s sales respectively in 2012.

Keppel Corp’s Offshore & Marine business activities are similar to Sembcorp Marine’s, and it has seen revenue triple from S$1.9 billion in 2002 to about $7.9 billion in 2012. The Infrastructure business includes operating power plants, undertaking environmental engineering projects and handling logistics and data centres. Keppel Corp’s major revenue stream comes from developing properties for sale and managing property funds.

Sembcorp Industries

Keppel Corp

Market Cap

S$8.9b

S$20.6b

Last 12 month Sales

S$10.2b

S$14b

Round 1: Valuation

In the first round of the Foolish Face-off, we compare the two companies’ valuations by looking at their Price-to-Earnings (PE), Price-to-Sales (PS), and Dividend Yield. We want to see which company is valued at a cheaper price by the market.

Sembcorp Industries

Keppel Corp

PE

11.8

9.2

PS

0.9

1.5

Dividend Yield

3.0%

3.9%

Share Price

S$4.97

S$11.43

*Based on last 12 months’ financial figures

We can see that Sembcorp Industries’ shares are trading at a higher premium than Keppel Corp’s based on its PE and Dividend Yield, though it PS ratio is lower. For that, Round 1 goes to Keppel Corp.

Winner: Keppel Corp

Round 2: Profitability

In Round 2, we focus on the companies’ profit margins and return on equity (ROE). Profit margins tell us how efficient a company is at turning each dollar of sale into profit. Meanwhile, ROE lets us know the rate of return on shareholder’s capital – generally, the higher the ROE the better.

Sembcorp Industries

Keppel Corp

Gross Margins

13.5%

31.5%

Net Margins

10.1%

19.7%

Return on Equity

17.5%

26.4%

*Based on last 12 months’ financial figures

Keppel Corp has much better margins and ROE than Sembcorp Industries. Besides, Keppel Corp has maintained a ROE above 20% for the past five years, a record that’s better than Sembcorp’s ROE range of 16.8% to 20.8%. So, Keppel Corp takes Round 2!

Winner: Keppel Corp

Round 3: Growth

In our final round in the Foolish Face-off bout, we take a look at the companies’ growth. Investors should look at a company’s growth because the intrinsic value of a business improves over time if it can manage to sell more goods and services and earn higher profits. Investors will also be concerned with a company’s dividend growth as it can mean a growing income stream for them.

Sembcorp Industries

Keppel Corp

Revenue Growth CAGR

0.6%

4.5%

EPS Growth CAGR

10.3%

7.0%

Dividend Growth CAGR

8.1%

5.8%

*Financial figures are based on the companies’ last five completed financial years.

Despite having lower top-line growth, Sembcorp Industries manages to outshine Keppel Corp in terms of profit and dividend growth. It is interesting to note that Keppel Corp has actually had consecutive years of dividend hikes since 2008, growing from S$0.35 per share to S$0.45. On the other hand, Sembcorp’s dividends have ebbed and flowed slightly, moving between S$0.11 and S$0.17 per share.

Winner: Sembcorp Industries

Foolish Bottom Line

Final Score: 2-1 to Keppel Corp!

Keppel Corp’s the winner here with cheaper shares and a better handle on profitability. However, that’s not to say Sembcorp Industries is a total let down. The latter has displayed better growth. Besides, a ROE of 17.5% for Sembcorp Industries is no mean feat either.

But it is important to recognise that we have not looked at other important factors such as their competitive strengths, capital structure and cash flow situation to come up with a definitive conclusion.

If you’re interested to know how other similar local companies fare against each other, stay tuned for more Foolish Face-offs!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.

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